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Homebuilders Get Demolished


Lennar results indicate bottom may prove elusive.

If you think that homebuilding stocks are bottoming out, you may be overly optimistic: Florida-based homebuilder Lennar's (LEN) second-quarter results are a good indicator that the industry still has a ways to go before turning around.

In this quarter, which ended on May 31st, Lennar lost $120.9 million, or 76 cents per share. While this represents an "improvement" over the $244.2 million or $1.55 a share it lost during the comparable period last year, it's still substantially more than the 59-cent per-share loss analysts had been expecting.

Lennar's total revenue offered little solace, plummeting to roughly $1.1 billion - 61% less than the $2.9 billion in revenue posted in the same period last year.

In fact, the only good news in Lennar's report was very bad news for its employees: Selling, general and administrative expenses were down 60% from last year, thanks in large part to headcount reductions.

The comments of CEO Stuart Miller made an already-bleak outlook even bleaker: Taken in conjunction with its earnings release, Miller acknowledged that "the remainder of 2008 will likely see further deterioration in overall market conditions."

Such grim predictions give little incentive for retail and institutional investors to purchase the stock. If the shares go through a rough tax loss-selling season, which I expect they will, this could be very dangerous indeed.

Stiff competition in a housing market glutted with foreclosures and other unsold homes is one factor in Lennar's sharp decline. The firm's reported average sale price on delivered homes was $274,000, compared to $298,000 recorded in 2007's second quarter. The value of the backlog also declined steeply, from $2.8 billion in 2007 to $1.3 billion in 2008, and has also declined in all of the fourteen states where the firm has operations - including California and Florida, the hardest-hit markets in the nation.

These results do not bode well for other homebuilders, particularly those with a footprint in the Northeast: Hovnanian (HOV) and Toll Brothers (TOL) come immediately to mind.

So where do analysts go from here, given the fact that the company missed estimates not by inches, but by a country mile? Worse still, the sell-side could disseminate unfavorable research in the days ahead, which would pummel the stock even further.

With numbers like these, it therefore makes sense to wait for the stock to stabilize before taking action.

Lennar closed at $13.34, down $1.23, or 8.44% in regular trading. In after-hours trading it rose $1.23, or 9.22%.
No positions in stocks mentioned.

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